By: Maria L. Murphy, Wolters Kluwer
As demand for sustainability information increases and ESG reporting evolves, the role of the chief financial officer is increasingly critical. CFOs can drive sustainability activities and encourage the bottom-line visibility of implementing sustainability, climate, and nature-related improvements.
Gary Simon, Chief Executive FSN and Leader of the Modern Finance Forum on LinkedIn, interviewed two individuals with deep knowledge of sustainability reporting for a webcast sponsored by Wolters Kluwer.
“Whether sustainability reporting is compulsory or not, there is demand for more accountability and action,” Simon said. “Finance functions of all sizes and in every geography will become engulfed by new reporting demands. CFOs could view this as just another compliance burden, but savvy CFOs know Finance is uniquely placed to accelerate sustainability benefits and savings.” However, many organizations still rely on decades-old systems, and it is not easy to link accounting and sustainability reporting.
Do companies and Finance leaders see ESG reporting as a compliance exercise or an opportunity?
“There is way more to ESG than simply compliance,” said Alessio Lolli, VP of Global Customer Engagement at CCH® Tagetik, “It is a source of competitive advantage through increased profits, better access to capital, and more employee engagement. We are seeing corporations realize the public is not just interested in whether they make money, but more importantly, how they make money.”
Lolli stated that, like all new initiatives, ESG reporting starts with compliance as organizations mobilize and assign ESG topics. “Organizations who see this only as a compliance exercise leave substantial value on the table,” he said. “When companies embrace ESG, they realize the potential for competitive advantage by aligning the entire organization and strategy.”
Companies are at different points in ESG reporting. “Some companies are taking risks and opportunities seriously, while some are only ‘ticking the box’ or taking no action at all,” said Richard Marshall, a non-executive board and audit committee member for an Asia-Pacific property company, a member of ICI’s global operations & technology leadership board, and an Executive Board member for ICI Unichema’s UK business.
Marshall observed the work of the Task Force on Climate-Related Financial Disclosures (TCFD) was influential because it created a structure around governance, strategy, risk management, and metrics and targets that moved the ESG debate from reporting to driving action.
What are the hot buttons for investors?
“The four TCFD categories are becoming the ‘hot buttons’ because they are embedded in voluntary and mandatory reporting requirements,” Marshall said. He noted organizations are taking action, and ESG reporting is starting to coalesce in response to proposed ESG reporting requirements from the International Sustainability Standards Board (ISSB) and the Securities and Exchange Commission (SEC).
“Regulators have been focusing on the financial services industry and requiring them to discuss ESG impacts on investment portfolios, which is cascading down to companies,” he said. “Also, increasingly, the public is waking up, and so are politicians, in areas like diversity, equality and inclusion, and climate and nature.”
Lolli noted that CFOs need to understand their customers have shifted from traditional investors because the definition of ‘shareholder’ has changed. “Today’s shareholders are more than investors that want financial return,” he said. “Shareholders are stakeholders with an interest in your products and sustainability initiatives – and want to be part of an organization that operates as a good citizen and has a good reputation.”
How can CFOs transition and change the culture from only investing for financial returns to investing for financial returns and achieving ESG impact?
CFOs and Finance teams play an important role in identifying and correlating the financial, environmental, and social data needed, along with controls over processes and systems. They can drive the process, link accounting and ESG reporting outcomes, and ensure management and the board of directors are engaged. “CEOs would look to Finance for leadership because of their knowledge of reporting processes, auditable data, and operational risks and opportunities,” Marshall said.
There is a change in the information required and the processes and systems required to handle it. “CFOs are heavily involved in strategy, governance, and risk management, and they have teams that are good at analyzing and reporting,” Marshall said. “But a big change is coming, with a shift from working with transactions and historical data to data that is estimated, forward-looking, and held outside the organization in the supply chain. There are also different types of decisions and issues to balance when considering the social and environmental impact of decisions, like capital expenditures.”
Challenges for CFOs
How do modern technology and automation support ESG initiatives?
Legacy accounting and management reporting systems may not be adequate to handle financial and ESG reporting. “There has been a push lately to fill the gap between operational data and financial impacts,” Lolli said. He recommends a cross-functional approach within the organization and getting stakeholder consensus on how automation can support ESG initiatives. “Companies may need an information hub or platform approach, rather than silo solutions, to support collaboration and leverage the power of ESG.”
ESG information needs to be reported on consistently and more frequently and needs to be auditable. “It is not just for annual reporting, but is used for earnings calls, analysts, and rating agencies,” Lolli noted.
What new skills are required?
As Finance takes on a bigger role in ESG reporting, new skillsets and training may be required. “Finance needs to understand ESG activity within the business to support management and to make system and process changes,” Marshall said. “There are thousands of pages of reporting standards and technical content to understand and apply.”
He also noted that CFO staff may need to be trained in change management and business partnering skills to interface with operational areas outside of Finance. “Also, a lot of the information is embedded in the supply chain and value chains, so Finance will have to go to different people and places to get information,” he said.
What should companies do now?
Simon suggested that companies that are not starting to look at ESG reporting will struggle.
Lolli agreed for two reasons: “This is a compliance issue with deadlines to be met,” he said. “But ESG is not only about compliance, but also about creating competitive advantage. ESG reporting is to inform the future and includes understanding how ESG initiatives will impact the bottom line three years from now. To get ready to do that, you must start planning and reporting now.
About the author:
Maria L. Murphy is a Senior Content Management Analyst Accounting & Auditing Product, Wolters Kluwer Tax & Accounting North America